Agrium's (AGU) CEO Charles Magro on Q1 2014 Results - Earnings Call Transcript

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 |  About: Agrium Inc. (AGU)
by: SA Transcripts

Agrium (NYSE:AGU)

Q1 2014 Earnings Call

May 07, 2014 9:30 am ET

Executives

Richard Downey - Vice President of Investor & Corporate Relations

Charles Victor Magro - Chief Executive Officer, President and Director

Kevin R. Helash - Vice President of Retail Canada/Pacific North West Region

Ronald A. Wilkinson - Senior Vice President and President of Wholesale Business Unit

Jason Newton -

Stephen G. Dyer - Chief Financial Officer, Executive Vice President and President of Retail

David J. Tretter - Executive Vice President of Procurement and Executive Vice President of wholesale sales of UAP Holding corp

Fredrick R. Thun -

Thomas E. Warner - President of North America Retail

Susan C. Jones - Vice President of Marketing & Distribution

Analysts

Jacob Bout - CIBC World Markets Inc., Research Division

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Matthew J. Korn - Barclays Capital, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

P. J. Juvekar - Citigroup Inc, Research Division

Mark W. Connelly - CLSA Limited, Research Division

Joel Jackson - BMO Capital Markets Canada

Christopher S. Parkinson - Crédit Suisse AG, Research Division

John Chu - AltaCorp Capital Inc., Research Division

Operator

Good day, everyone, and welcome to today's Agrium's First Quarter Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now for opening remarks and introductions, I'd like to turn the call over to Mr. Richard Downey, Vice President of Investor and Corporate Relations. Please go ahead, sir.

Richard Downey

Thank you, operator. Good morning, everyone, and welcome to Agrium's 2014 First Quarter Conference Call. On the phone to review and discuss our results is Agrium's leadership team, including Mr. Chuck Magro, President and CEO of Agrium.

As we conduct this conference call, various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders, as well as our most recent Annual Report, MDA and Annual Information Form filed with Canadian and U.S. securities commissions, to which we direct you.

I will now turn the call over to Mr. Chuck Magro.

Charles Victor Magro

Thank you, Richard, and good morning, everyone. The spring application season is now in full swing across much of North America. As the largest agricultural retailer, both within the U.S. and globally, as well as a leading producer of Wholesale nutrients, we have excellent visibility into the current situation for crop inputs from a grower and a retailer perspective, and we will share our views on that with you today.

Before we get into those details, let me start the call this morning by reiterating that we firmly believe Agrium's strategy will continue to deliver superior value for shareholders and customers, and that our fundamental earnings power has an impressive growth runway.

While our net earnings were down this quarter, we generated a record $788 million in cash from operations as we continue to focus on optimizing working capital requirements. The unusually long and cold winter resulted in a late start to the spring season across North America and created transportation issues for some of our products. Furthermore, the unplanned outage at our Carseland facility will reduce our nitrogen volumes and have a onetime cost impact, which is expected to lower second quarter earnings by $0.35 per share. While outages happen across the nitrogen industry, I will not make excuses. Our nitrogen downtime over the past year has been excessive. The majority of these outages have been caused by the failure of specific equipment at the Carseland and Redwater facilities. We have conducted a thorough review and developed a detailed plan to address this issue. We recognize improved reliability is critical to our business results, and we are working multiple avenues to ensure we make this happen.

We also announced this quarter that we locked in gas prices for 15% to 20% of our natural gas requirements for our North American nitrogen assets for the 3 years 2016, '17 and '18. The average forward gas price we locked in at was approximately $3.50 per MMBtu, which is almost $1.50, or 30% lower than our average gas price paid in the first quarter this year. When we take into account our industrial nitrogen contracts, which have a natural hedge, this would bring our effective total gas position to about 1/3 of our total gas needs for this period. We believe this action will help lock in highly competitive margins and enhance the stability of our nitrogen earnings.

We also are happy to report that construction on the second and third MOPCO nitrogen units in Egypt have recommenced, with about 650 contractors on site. The first of these 2 facilities is expected to be operational by the end of 2014, and the second facility is expected on stream 3 months after that. This will increase urea capacity at the site by 1.3 million tonnes, of which Agrium has the offtake to market. This equates to an additional 340,000 tonnes of urea capacity for Agrium, given our 26% ownership in MOPCO.

Moving to Retail's results for the first quarter. Our U.S. operations were impacted by the late spring. EBITDA for North America was $39 million below the previous year's level, with lower sales for all product categories within the U.S. The challenge with reporting quarterly earnings on an agricultural Retail business is the first quarter results are highly dependent on when the season starts. It's important not to read too much into this quarter's results and you need to focus instead on the first half results.

This is particularly true this year, as cold weather was extreme in the first quarter, with it being the sixth coldest winter in the past 120 years across the Corn Belt, and it reached much further south than it has in the past. Southern states like Tennessee still had snow on the ground as of mid-March. Usually, this region would be well into seeding the corn crop at this time. Furthermore, the recently acquired Viterra Retail business has traditionally seen a loss in the first quarter due to the seasonality of the Western Canadian market.

Retail's first quarter results were supported by significant year-over-year improvement in financial performance of our international Retail operations. EBITDA from the international businesses were $31 million higher compared to the same quarter last year. This was due to higher gross profit and lower costs in both Australia and Argentina. We are also on track to deliver $100 million of EBITDA from the Viterra Retail business by 2015.

Total Retail nutrient volumes in the first quarter were significantly higher year-over-year due to the Viterra acquisition and higher sales volumes in international markets. U.S. sales volumes in the first quarter of this year were comparable to last year's figures and were supported by heavy application rates of potash and phosphates on frozen ground, although ammonia applications were lower.

Total nutrient margins were 16% -- or $16 per tonne lower than last year. However, much of the differential was due to changes in regional and product sales mix. Nutrient margins as a percentage of sales in the U.S. remained unchanged compared to the first quarter of 2013.

Sales for both crop protection and seed in the U.S. were down about 9% and 14%, respectively, compared to the first quarter of last year due to the late season. Margins and gross profit on crop protection products were also lower due to relative shifts in product, geographies and customers.

Total gross profit for seed was slightly higher than last year. This was supported by the inclusion of the Viterra seed business this quarter, which includes a higher-margin canola plant breeding program. Viterra's proprietary seed is sold under the brand name Proven.

Sales of the merchandise category was up significantly this quarter due to the inclusion of the Viterra fuel business, which was part of the acquisition. Margins on the farm fuel business are relatively low, but it provides an additional customer touch point for our Canadian Retail operations and has very low working capital requirements.

We made a decision to exit the international export wool business in Australia last year due to poor return on investment metrics and high working capital needs. As a result, the application in other services line item saw a significant decline in sales but a substantial increase in percentage margins. Gross profit for the application and services increased over last year despite lower sales as a result of a stronger livestock market in Australia.

We will continue to adjust our portfolio of products and services in this -- in other markets in order to maximize profitability of our businesses. We closed on 5 separate value-enhancing Retail acquisitions within the U.S. this past quarter, representing annual sales of over $40 million. The first quarter is traditionally a slow quarter for acquisitions, and we believe we have a good pipeline of tuck-ins, which will allow us to achieve our annual target at an attractive multiple. We continue to see strong traction for our leading Echelon brand precision agricultural offering. Before the end of the year, we will -- we expect to bring you additional clarity on our strategic plan for this growing portion of our business. Given the field activity we have seen over the past month, we expect to deliver strong Retail results in the first quarter of 2014.

Turning to our Wholesale operations. The first quarter saw adjusted EBITDA of $237 million, down 40% from the first quarter last year, due primarily to lower year-over-year benchmark prices. While nutrient prices improved during the first quarter of 2014 from their lows at the end of 2013, there is a lag in realized selling prices compared to the benchmarks due to forward sales of the product.

Nitrogen gross profit in the first quarter was $100 million, down from $186 million in the first quarter last year due to a combination of lower year-over-year prices and higher natural gas costs. Our cost of products availability -- our cost and product availability were impacted by reduced production rates at our Joffre ammonia facility as a result of feedstock constraints from a key supplier.

The ESN business integration into Wholesale is well under way, and its results were reported within the nitrogen segment of our financial statements. We expect $10 million to $15 million of cost savings by the end of 2014 as a result of this action. Demand continues to be strong for this unique nitrogen product.

Phosphate margin showed some improvement this quarter versus the fourth quarter of 2013 as a result of higher MAP prices. Our second quarter costs will be impacted by a planned 24-day maintenance outage in June at our Conda phosphate operations. We had some short-term challenges with processing the new OCP rock, but expect to be through these issues by the end of the second quarter of this year.

Potash gross profit was $46 million in the quarter compared to $84 million in the same period last year due to weaker year-over-year market prices. Our North American sales volumes were up significantly this quarter as a result of pent-up demand from the fourth quarter of 2013.

Our international sales volumes were lower due to logistical challenges in getting product to Vancouver ports, some reduction in our Canpotex allocation and an increased focus on higher-margin North American markets. As part of our preparation for our expanded potash capacity in 2015, we purchased and sold approximately 50,000 tonnes of potash from third parties.

From a financial perspective, the tax rate this quarter rose to 29% and is expected to remain at about this level for 2014 due to a lower proportion of expected earnings from Canada, which has a lower tax rate. We expect the tax rate to improve to 27% again in 2015 once the additional earnings power from the potash expansion starts to be realized.

Turning to the outlook. Grower sentiment in terms of crop input demand is strong this spring. This is being supported by crop prices and margins, which have rebounded over the past few months. Corn is back up to the $5 mark, and new crop soybeans are over $12 per bushel. At these levels, growers have every incentive to optimize their use of crop inputs and services.

As evidence of this, we are seeing strong application rates by growers for all 3 nutrients so far this year. However, there will be a small headwind with respect to the expected shift in acreage out of corn to more soybeans. One of the biggest challenges for retailers across North America so far has been getting crop nutrients supplied on a timely basis due to the logistical constraints. The late start to the spring season has provided an opportunity for fertilizer deliveries to catch up to a certain extent, but it is expected to continue to present challenges as the peak application season arrives simultaneously across most regions.

Seed price and demand will show good growth again this year, including our Dyna-Gro branded seed. We also see a continued increase in demand for crop protection products and related spraying services due to the continued escalation of weed resistance to glyphosate.

In terms of market nutrient outlook, we expect a tight North American nitrogen supply demand balance through the application season due to a combination of strong demand, transportation bottlenecks and some recent plant outages. This, plus the delayed start to the season, may result in an extended application window this year.

In terms of new supply over the medium term, we see a balanced global supply demand outlook for the next 3 to 4 years. The big unknown for the global urea market will be the level of exports out of China, given the stronger pace of exports so far this year. However, the impact of project delays, gas restrictions and lower operating rates and outages in other nitrogen export markets will also be an important driver of nitrogen pricing. We believe a global urea floor price will again hold through the summer months, although it will likely be at a slightly lower level than experienced last year. Our North American gas costs and end market advantages ensure our nitrogen margins will remain strong relative to international players.

In the global phosphate market, we have seen some pressure on phosphate prices and expect this to be reflected in the North American market as we enter the summer period. However, improved demand -- particularly in demand is a potential positive driver in the second half of 2014. Some global potash price -- spot global potash prices have increased over the past couple of months, as Brazilian imports and North American potash shipments have been strong so far in 2014. Increased stability in the potash market is expected to support buyer sentiment and demand growth throughout 2014.

In closing, I would leave you with a few of these thoughts. You will see a significant emphasis on Agrium's operational excellence program this year. We will focus on all aspects of the business that we have direct control over, including reaching our Retail targets, maximizing production on-stream time, delivering on our identified growth portfolio and focusing on controllable costs, including reducing G&A across the company.

Grower demand for all crop inputs is in excellent shape, and Agrium's fundamental earnings power for Wholesale and Retail remains strong and is set to grow. We have a clear line of sight to capacity growth of 20% in our Wholesale business in the next few years and have targeted over a 30% growth in our Retail earnings. This will generate significant free cash flow, and we are committed to returning capital to shareholders through dividends and share buybacks over the coming years as our free cash flow grows.

With that, operator, let's open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from line of Jacob Bout from CIBC World Markets.

Jacob Bout - CIBC World Markets Inc., Research Division

Just a question on your second quarter guidance. Maybe talk a little bit about the outlook. Has the outlook for Western Canada dampened a bit you're -- how you're looking at the second quarter, especially considering the rail issues and then that impacting working capital and perhaps input demand?

Charles Victor Magro

Jacob, maybe I'll make a couple of high-level comments on Q2 guidance and then I'll pass it over to Retail and then we can have Wholesale even comment on Western Canadian market outlook. When we look at the -- my thoughts on the second quarter, if you look at it, obviously, we're being impacted by the Carseland outage, which we, of course, believe is completely temporary. But it is having a $0.35 per share impact. We did also have a hydrogen restriction from a feedstock perspective for our Joffre facility, which is now behind us. But that will impact the second quarter, and that has impacted guidance. And then, there is the tax issue. So when you look at it, up 2 percentage points, that's really a volume from a Wholesale sales perspective due to the potash outage that we're going to have in the second half of the year. And so that, we think, will correct itself as well as we move into 2015. From a Retail perspective, what I would tell you is things look good. We are expected to have a fairly strong Retail second quarter and first half. And just to specifically answer your questions now in Western Canada, I'll have Kevin Helash, who runs our Canadian Retail business, to comment specifically on that.

Kevin R. Helash

Sure. In terms of Western Canadian demand, we don't see anything out there today to make us believe we're going to have anything but a fantastic season. We're a little bit behind as of today. But with our Retail footprint, we shine, I think, the best of anybody out there when it comes to a compressed season. So all in all, we're looking forward to a very, very good run this first half.

Charles Victor Magro

And then, Jacob, maybe I'll just have Ron Wilkinson, our President of Wholesale talk to you about the Wholesale market conditions in Western Canada.

Ronald A. Wilkinson

Jacob, I guess we've talked about the Carseland outage impacting nitrogen availability and also the issue at our Joffre plant. Looking forward towards the end of the second quarter, the other factors impacting us are the planned turnaround at Conda, that Chuck mentioned, for 21 days and also, a planned turnaround at Fort Saskatchewan that starts May 31 that will run through the rest of the quarter. So those are additional factors impacting, I'll say, Wholesale's contribution to the second quarter earnings.

Jacob Bout - CIBC World Markets Inc., Research Division

Maybe just a quick follow-up here on the international Retail side. Looking quite strong in the first quarter. You talked a bit about Australia and South America being fairly good. Where does Europe fit into that mix?

Charles Victor Magro

Is your question specific to Retail in Europe?

Jacob Bout - CIBC World Markets Inc., Research Division

Yes.

Charles Victor Magro

Jacob, what I would tell you is, certainly, we're focused on a couple areas when it comes to Retail right now. I'd say, from a growth perspective, we are focused on the United States. So it is still, in our existing footprint, the lowest market share region we have. Based on the first quarter tuck-ins that we reported this quarter, you could see that there's still a very solid pipeline of opportunity for us to continue to grow our Retail business in the U.S. That would be the first priority. Simultaneously with that, of course, we're focused on improving our Australian operations. As you know, we made some leadership changes there. We've got, I think, a very strong team in Australia right now, and we're seeing some positive results. So we're very pleased with the progress. But one quarter doesn't make a trend, and we need to keep the pressure on there and I think we've got the right line of sight. Then the other area that we're interested in from a Retail perspective would be Brazil. So, I know your question is specific to Europe, but we see more opportunity for our Retail business in Brazil. We have an operation right now, a very small operation. We're seeing very good results. The long-term growth fundamentals are very strong in Brazil. And most importantly, we think our high service offering can add a lot of value to farmers in Brazil and create a lot of value for the Agrium shareholders. So from a priority perspective, we don't see Europe as a major Retail priority. We see United States continuing to fix the Australia business and then focusing growth in Brazil.

Operator

Our next question comes from the line of Kevin McCarthy from Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Chuck, can you speak to the decision to layer in the natural gas hedges in 2016 through '18? Is it tactical in nature in that $3.50 was just too low to pass up on the curve? Or should we expect a consistent long-term hedging from the company as a strategy? And then, what hedges do you have in place prior to that through 2015, please?

Charles Victor Magro

Kevin, great questions. So to answer your second question first, we don't have any long-term hedging for 2015. What we've done is we've taken a position around 15% to 20% at $3.50, that's Canadian gas, for '16, '17 and '18. And really, when we looked at it, we thought it was a very prudent position to take given our view on long-term gas. At $3.50, we just saw more pricing risks to the upside than downside, and so we did take a position because we thought it was too good to pass up. And I would tell you this, when I look at it now, it's going to provide us with a significant stability of free cash flow coming out of our nitrogen business at what we consider to be very attractive margins. And so long term, we still believe the North American gas will be advantaged globally. We don't -- our long-term view has not changed one bit. But at $3.50 for Canadian gas, we just thought that it would provide a nice, stable free cash flow out of that business and at attractive margins. Will we do more? We're constantly assessing it. We have a lot of experience in gas at our management team and on our board, and it's something that we're going to continually reflect on as the gas markets move around a little bit. But certainly, we're pleased with it right now and the numbers we referenced in my prepared remarks. So far, it looks like it's been a pretty solid decision.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Okay. Then a second question, if I may. Would you provide an update on the project cost estimates and timing at Vanscoy and Borger, please?

Charles Victor Magro

Sure. I'll pass that question over to Ron Wilkinson. He'll give you an update.

Ronald A. Wilkinson

Sure. On the potash expansion at Vanscoy, we're still on track to complete that project by the end of this year and be starting it off as we move into 2015. I think we've mentioned a number of times it'll be a 3-year ramp-up before we get to the full production rates. And we're projecting that we should be doing our Canpotex test run in the second half of '15. Costs are still on track versus what we reported last quarter, so there's no change there. The Borger project is going quite well at this point. It is early days. We are ahead -- slightly ahead of schedule on engineering and procurement, and construction has started on the site. I was there last week and things are moving fairly quickly. In terms of cost, again, no change in terms of -- versus what we've reported. And schedule for Borger, start-up by the end of next year.

Charles Victor Magro

And, Kevin, maybe just a couple of comments. So on the potash expansion, I'll just remind folks that, of course, that this project has attractive long-term returns. But it's also going to reduce our Canadian cash costs by $20 a tonne and improve our Canpotex allocation. So it is quite strategic for us. And as Ron mentioned, we're looking forward to starting that plant up in early 2015.

Operator

Our next question comes from the line of Matthew Korn from Barclays.

Matthew J. Korn - Barclays Capital, Research Division

Question for you, Chuck. In your view, do you believe we've seen peak NPK prices for the year? And if not, what kind of dynamics could unfold that would lift pricing up into the second half?

Charles Victor Magro

Matthew, I'm going to pass this question over to Jason Newton, our Head of Market Research. He can give you a kind of a feel for it. But generally, what I would say is, when we look at all 3 NPKs, from a nitrogen perspective, it's -- I don't think that we've necessarily reached the peak. It's hard to tell. The supply-demand balance globally is working, so high-cost production is being shut in, and it's going to depend on kind of what does that look like and what does demand look like in the second half of the year, as well as what does the application window look like for the first half of the year and does -- is it extended. When it comes to phosphate, really, it's going to be a question on the India demand, and I'll have Jason Newton talk about that. And then potash, when we look at it year-over-year, we're seeing pretty solid growth rates, 4% to 5%. And I think that it's heading in the right direction, but that is a commodity that, generally speaking, is long. And so I think you're going to see some upward momentum, but I don't think it'll be at a spot where it's going to be a significant upward momentum. So, Jason, maybe talk a little bit about the specifics, if you can?

Jason Newton

Okay. Matthew, I think we've seen pretty strong prices in the first half of the year so far. They've started to come off of the highs, which is typical moving into the summer season. We're still seeing North American nitrogen and phosphate prices at a premium to the global market and likely see that come down as we enter into the summer. I think depending on a number of things, the last half of the year could be positive for phosphate. It comes down to India whether they're at or above 5 million tonnes of imports. We could see the phosphate market tighten in the fourth quarter. Nitrogen, you typically seasonally see the market start to tighten once the Chinese export window closes at the end of October. And so you would expect that you can potentially see some upward momentum in nitrogen prices in Q4. In potash, we've seen prices slowly start to trend higher, and I think that will be one where we probably -- I'm not sure we'll see much movement, relatively flat bias on potash for the second half.

Matthew J. Korn - Barclays Capital, Research Division

All right, I appreciate that. Chuck, my follow-up on this one, there were some headlines late in the winter during the mid-conference season that you were looking across at some of the other asset groupings for a potential sale. Could you maybe set us up what you're thinking as right now about the current total Agrium asset portfolio as it stands?

Charles Victor Magro

Sure. So the beauty about having a very consistent strategy is that we know what we want to do. So we are completely focused exclusively on agricultural products and services. And generally speaking, I'd say we're pretty happy with our portfolio. I think we have globally competitive assets. We have a great team. But we're always constantly assessing the portfolio to ensure that we have the best assets to create long-term value. And we've made a decision recently on our -- some of our AAT, what I would consider to be the nonagricultural parts of that portfolio. And hopefully, we'll have something to announce soon. And we're also looking at other parts of our portfolio, of course. Specific to -- I think the reference you're making, Matthew, I think the question was really related to our phosphate business. And what I'd tell you is that our phosphate business, generally speaking, has been a very solid business, and it has contributed significant shareholder value in the past. We have strong regional competitive advantages when it comes to the inputs that are needed to run those businesses. And strategically right now, what we're focused on is really securing a phosphate rock source that would improve our overall cost. So strategically, that's really what we're focused on right now. We're constantly assessing the portfolio, and we will make some additional changes in the future. But they'll be, I think, announced when the right time is.

Operator

Our next question comes from the line of Don Carson from Susquehanna Financial Group.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Chuck, I want to go back to your opening statement about nitrogen operating performance, and maybe just give us a few metrics. Because it does seem anecdotally you've had more than your fair share of nitrogen outages. Is it underinvestment in the assets? Is it the fact that they're aging? Or is it just day-to-day operational management?

Charles Victor Magro

I'll give you my thoughts and then I'll pass it over to Ron Wilkinson, Don. So those plants, of course, are over 40 years old, but that is absolutely no excuse. Certainly, when I look at the performance over the last 12 months or so, it is really contained to 2 of our 5 North American plants, and the downtime has been excessive. And it's coming down to some very specific and known pieces of equipment that we need to deal with. We have a plan to rectify those pieces of equipment. We've made this -- Wholesale is #1 priority. And it is, in my view, a short-term situation, but we do need to work through a couple of these selected pieces of equipment. If you look at the rest of the nitrogen assets in Agrium's portfolio, I'd say the operating times are actually very strong and our P&K asset utilization is actually some of the leading in the industry. So we believe that this situation is really contained to 2 of our facilities, and we've got a plan. So maybe Ron can talk a little bit more in detail on that.

Ronald A. Wilkinson

Sure, Don. You mentioned underinvestment. We have a pretty aggressive, sustaining capital program for our entire Wholesale manufacturing facilities. We're also doing a lot of work in improving what I'll call our management processes and systems around operating those plants and getting them up to the petrochemical industry standard. We -- this Carseland incident has been unfortunate. We're very disappointed. We should have that plant back online by mid-June. The Redwater situation, we are nursing the heat exchanger that failed twice last year. We have a replacement that should be on the ground next month. And we have a shutdown, a 45-day shutdown planned starting in September for the Redwater nitrogen plant to replace that exchanger, and we advanced a turnaround at this plant for next year. So our plans are that, by the end of the third quarter, this should be past us. But there is longer-term work to do, and we're committed to get that done.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

So just as a follow-up, what -- you talked about the $0.35 hit in Q2, what kind of impact is this going to have in Q3? And so are you saying that you'd be back to an industry standard operating rate by Q4?

Ronald A. Wilkinson

We can work offline, I guess, on any impacts for Q3. But essentially, yes. By Q4, I think we should be where we need to be.

Operator

Our next question comes from the line of Adam Samuelson from Goldman Sachs.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Maybe a question on Retail in both the outlook for this year and the visibility of the targets in 2015. I mean, as you look at the first quarter performance and the outlook that you've embedded in the guidance for 2Q, has the outlook for Retail in the first half met, exceeded, fallen short of your initial 2014 expectations? And second part of that question is, how has that performance compared relative to the trajectory you have for the $1.3 billion of Retail EBITDA in 2015?

Charles Victor Magro

Thanks for the question, Adam. I'll give you a couple thoughts, and then I'll pass it over to Steve Dyer, our President of Retail. When you look at the first quarter specifically, there's 2 issues you have to consider when it comes to our Retail business. The first issue, of course, is the winter weather. It went a lot further south than even last year, and we were simply not able to get on the field. So that impacted what I would consider to be our U.S. Retail operations. Specifically in Canada now, with the acquisition of Viterra's Retail business, the earnings profile for Retail is going to change a little bit. Traditionally, our Retail business in Canada will lose money in the first quarter and make most of its money in the second and a little bit in the third quarter. So you're seeing 2 dynamics, an unusually cold and harsh winter impacting our U.S. business and the Canadian business having a different earnings profile. And then, I think the good news from a Q1 perspective is our international Retail businesses really improved significantly. And I think Australia actually was a record in the first quarter, so we're delighted with that. As for the -- your 2015 targets and how comfortable we are, I'm going to pass that over to Steve Dyer.

Stephen G. Dyer

Sure. Thanks, Chuck. Adam, I'm going to stick on my CFO hat for a quick second here and Chuck mentioned around with the Viterra acquisition. I'll probably just highlight again, as we will have more product in the first quarter moving into our Retail business because of the Viterra acquisition from our Wholesale. So that will have an impact on our -- what we call our gross profit elimination, so a bit of a shift in earnings from that first quarter to second quarter on a go-forward basis. So just wanted to highlight that again. And then just turning to the metrics. We still are on target to achieve that $1.3 billion run rate by the end of 2015 for our EBITDA. And we made good progress on our other metrics as well, our EBITDA, working capital. If you actually take a look at our Schedule 5, where we highlight those, we have made improvements across-the-board other than the coverage ratio, and that was impacted by Viterra acquisition, which is strictly timing because we have that included in the first quarter this year. If you look at the North America, we had improvements across-the-board significant on all of those metrics as well.

Charles Victor Magro

And one last comment, Adam. Even when you look at our working capital, our absolute working capital quarter-over-quarter, we're down $300 million. And some of that is price, of course, but some of it is also volume and optimizing our network and optimizing our working capital needs. So I think you're going to see some pretty significant progress on all of these metrics as we get into the second quarter and then the remainder of the year.

Adam Samuelson - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And maybe just a clarification question within Retail. In the quarter, I think the crop nutrient unit margins were down -- were $70 a tonne, or significantly down year-on-year and lower than they had been in the recent years, and just trying to understand what drove the mix there. It seemed like the U.S -- North American volumes were good, and that's usually your higher-margin business. So I'm just trying to make sure I understand what's going on in that piece of the portfolio.

Charles Victor Magro

Okay. Steve Dyer will answer that question for you, Adam.

Stephen G. Dyer

Yes. If you look at overall, that's really just a mix, with the addition of Viterra as well as the late season. But maybe I'll ask David Tretter to add a little bit more color specific to the margins on the -- on fertilizers.

David J. Tretter

Adam, this is Dave. If you look at the fertilizer in the first quarter, a lot of that product in U.S. went to, I'll call it, demand service customers, which normally have a lower margin. In addition, the price per tonne was down some. So that has pushed a little bit of the margin per tonne down. As mentioned earlier, the percentage per tonne -- the percentage per dollar is about flat with last year. But as mentioned, a lot of it's influenced by customers that are not full-service customers.

Operator

Our next question comes from the line of Ben Isaacson from Scotiabank.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Chuck, maybe just a couple of questions on Retail for you or Steve. You talked about 5 Retail acquisitions and a strong pipeline. There has been some chatter that the low-hanging fruit is drying up a little bit. Can you talk about the valuation multiples that you're paying for those transactions relative to the past and kind of how you see that tracking?

Charles Victor Magro

Sure, Ben. I'll start and then I can pass it over to Steve to give you a bit more specifics. So generally speaking, we're very pleased actually with the pipeline. I think that this business is getting very sophisticated when it comes to technology, in data management, in precision agriculture. And certainly, what we're seeing is that there are an awful lot of opportunities. And you're going to see us put more priority of growing our Retail business in the U.S. because we have the most synergies from our scale and size. So that is going to be a preferential area for us to grow in. And what I would tell you from a multiple perspective it's still sub 6, 5.5 or so. And we are seeing more competition. We've said that for quite some time. Certainly, over the last year, I think that there is a lot of interest in this area. But what I would tell you and what I told my team is, we have the most synergies than anybody else in the U.S., certainly. So we're going to be aggressive on the ones that I think that fit strategically for us, and there's still some holes in our footprint, at some areas that have irrigated land that just are so valuable to us that we're going to go after. So we're not going to do a carte blanche across the U.S., but we're going to fill some very specific areas. And then, as well, we're going to continually optimize our network and continue to rationalize certain parts of our footprint to get overall efficiency. So maybe, Steve, you can give a bit more color.

Stephen G. Dyer

Yes, just a little bit more color. If you look at the ones we did in this past quarter, they actually were in at those 5 multiples. And as Chuck mentioned, we are seeing a little bit more pressure there. But we -- as mentioned, it is our lowest market share jurisdiction in the U.S. in particular, and there is a significant amount of market shares held with the independent up there as well. So we, again, still see a very good pipeline moving forward through the next couple of years.

Ben Isaacson - Scotiabank Global Banking and Markets, Research Division

Okay, great. And then just as a follow-up, you talked about hitting roughly $100 million of EBITDA from Viterra in '15. As you're integrating Viterra, can you talk about those synergies and how are they tracking? And are there other opportunities or are some a little bit behind schedule?

Charles Victor Magro

Sure, Ben. What I'll do is I'll pass it over to Kevin Helash, our Head of our Canadian Retail business. Go ahead, Kevin.

Kevin R. Helash

Yes. I would say that as we get to understand the Viterra business better and all the shelves and their proprietary seed business and the combination with our Loveland Products, we're very excited about the opportunities that, that entity is bringing to us, and I would say we're very comfortable with our synergy targets and achieving them in the time frame we've stated.

Operator

Our next question comes from the line of Andrew Wong from RBC Capital.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

I just wanted to focus a little bit on the contribution from equity income. It looks like that's come down quite a bit year-over-year and sequentially. Can you talk about what has caused the weakness there, and maybe what your expectations are for Profertil and MOPCO for the rest of the year?

Charles Victor Magro

Okay. Andrew, what I'll do is I'll pass over the specific question to Fred Thun, our Corporate Controller. And then the outlook for Profertil, I'll ask Ron Wilkinson to comment on that. So go ahead, Fred.

Fredrick R. Thun

It's Fred here. Andrew, with regard to equity income, we are down year-over-year. In Profertil, we've experienced, obviously, the commodity cycle and then the impact of foreign exchange rates. MOPCO itself is more of a commodity cycle issue. So that's the financial impacts. I'll give it to Ron to talk about the operations.

Ronald A. Wilkinson

Sure. On a go-forward basis, Andrew, obviously, Fred mentioned that both are flowing with commodity prices. We have had a little bit of downtime with MOPCO in Q2 due to natural gas availability, but the plant is running at full capacity now. With Profertil, we're entering the winter season now, so we do expect some downtime associated with natural gas as we enter the third quarter here, plus we have a planned turnaround. But hopefully, as we get to near the end of the year and we see the additional MOPCO train come up, we'll see that equity income start to rise.

Andrew D. Wong - RBC Capital Markets, LLC, Research Division

Okay, great. That's helpful. And then, I guess, just a follow-up a little bit on the crop protection segment. Looks like margins have come down a little bit because of the product and geographic mix. Can you help us understand what the margins would have been if you take out some of those changes and maybe, on a comparable basis, to year-ago levels?

Charles Victor Magro

Sure, Andrew. What I'll do is I'll have Dave Tretter talk about the specifics. But what I'd tell you is we're still seeing pretty solid growth rate overall from a crop protection perspective for Retail, but there are some mix and regional issues that Dave can speak to. So go ahead, Dave.

David J. Tretter

Andrew, it's Dave. It would really be hard to try to put the toothpaste back in the tube and figure out what it would have looked like because every season is a little different. But certainly, with the later season, similar to the fertilizer, a lot of the customers that bought product were, I'll call them, cash and carry, where they didn't need the service. We also had some increase in our business in the way southern part of the U.S., which is normally a lower-margin business, as well as the product mix was slightly different because we didn't have a lot of burn down yet as the season is delayed. So looking to the second quarter, we expect the second quarter to be similar to what the second quarter was last year. And as Chuck mentioned, we are seeing pretty good demand in the crop protection arena from customers as the commodity prices are still strong and the farmers want to do all they can to get a good crop.

Operator

Our next question comes from the line of Jeff Zekauskas from JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

In your Retail segment in the first quarter, your selling expense was up about 12% and your ratio of selling expense to revenues, I think, climbed about 130 basis points. Are any of those numbers representative for the second quarter? That is, what would be a way to think about Retail selling expenses in the second quarter?

Charles Victor Magro

Yes, Jeff, it's Chuck. I'll have Steve kind of comment specifically, but I think he even mentioned already, this is purely a timing issue, given that we had the Viterra acquisition. So we have the people, and the business is really primarily a Q2 and Q3 business. So overall, we don't expect any structural changes. In fact, we expect improvements. But go ahead, Steve.

Stephen G. Dyer

I'll just give a little bit more color. It is purely due to Viterra and that's -- when you take a look at that ratio year-over-year, it's strictly the timing issue because you have that. And it's about $50 million of expense in Viterra increased as you see in North America. And again, we don't have any earnings against that yet, which we'll have in the second quarter versus last year. If you look across-the-board, U.S. is basically flat, and our international operations have actually seen an improvement in their cost structure. So, we're actually down both in South America as well as Australia from an operating cost standpoint. So strictly a timing issue with the addition of Viterra, when you -- especially when you compare the metrics year-over-year.

Operator

Our next question comes from the line of P.J. Juvekar from Citigroup.

P. J. Juvekar - Citigroup Inc, Research Division

Chuck, looking back when JANA was involved in your stock, you talked about Retail store consolidations. Can you give us an update on that, especially in light of the Viterra acquisition?

Charles Victor Magro

P.J., yes, so even before JANA was on the scene, this has been an ongoing optimization effort. Retail does it, I think, exceptionally well, where they're constantly looking at how many facilities they need and what region, balancing off the customer needs with the supply-chain, working capital and operating cost needs. In fact, if you look at the data that we presented even late last year, we had shut down almost 20% of our North American footprint. In fact, last year, in the U.S. alone, we rationalized 43 facilities. So if you start thinking about that, yes, we're growing our Retail footprint, we're doing our tuck-ins, the pipeline is robust, we have some optimization work to do still in the network. But shutting down 43 facilities in 1 year in the U.S., that's one of the key drivers why our working capital is down, and it is a strategic focus for our Retail business to not only drive for that EBITDA growth but to improve overall efficiencies. And I think this is already a world-class business, but we're continually focused on optimizing that business.

Operator

Our next question comes from the line of Mark Connelly from CLSA.

Mark W. Connelly - CLSA Limited, Research Division

Two questions, Chuck. So we're hearing from pretty much everybody that dealers want to end with low inventory, but also that farmers are going to want to move fast and hard in the fall. So how does Agrium, with both its Retail and its Wholesale, positioning itself to manage those competing priorities this year? And then a second question. In the last couple of years, we've seen a lot of pesticides sitting on the shelf at the end of the season when demand didn't turn out to be strong. Have the changes you're making in the way you manage Retail reduced the likelihood that you're going to get stuck with that this year?

Charles Victor Magro

Great questions, Mark. What I'll do is I'll give you some high-level comments and then I'll talk about -- let Tom Warner talk about the strategy for inventory management in Retail, and then I think Dave Tretter can answer your pesticide question. So it's always going to be a challenge, I guess, at the highest level. The Retail focus is always to be as empty as they can be. And with a big system and a big network, empty is not 0, but we try to do our very best. And given some of the production outages that we and others have had in the industry, I think, generally speaking, the market conditions could be quite tight. And so that's going to be, I think, a challenge for the fall season and next year spring season to make up the inventory shortages throughout, specifically, North America. Tom, why don't you talk about Retail and then maybe the farmer piece as well, if you can.

Thomas E. Warner

Sure, Mark. I'll talk about the fertilizer and seed, and Dave Tretter will cover chemicals, Mark. We're in very good shape in fertilizer right now as we finish our spring season. We plan to be just a typical near out or out after the spring season. We will begin to reload on fertilizer beginning this summer when the product [indiscernible] are available. The fall, as far as what we see now, the farmers right now, [indiscernible] very good. So they'll be churning pretty early. But our fall season wouldn't start until September, October time frame. But we should be in excellent shape on fertilizer. Seed, we've got our seed inventories in excellent shape this year. The last couple of years, the last 3 years, we had issues with the supply of seed because of the drought. This year, we haven't. So we've been a lot more careful. We haven't taken any inventories, so our seed inventories should be at all-time low at the end of the spring season.

Charles Victor Magro

Dave Tretter?

David J. Tretter

Mark, this is Dave. If you look at the crop protection piece, it's really 3 different areas: herbicide, insecticide, and fungicide. In most years the herbicide business is relatively flat, so we don't normally end up with a lot of inventory, although about the middle of the summer, we'll start putting products back into the tanks for the following spring. The benefit there is we won't have to pay for that stuff until next year, so we will have the inventory but not the working capital tied up. The 2 variables in the summer are insecticide and fungicide. We will stock up early to be prepared for those, assuming that there will be a good market. And the inventory really will depend on how strong the insect pressure is and the fungicide applications are. But on both of those as well, the inventory that we have carried over, we will have working capital relief from our manufacturers on a good portion of that. So even though we may carry the inventory, we normally don't have a lot of working capital tied up in those products.

Operator

Our next question comes from the line of Joel Jackson from BMO Capital Markets.

Joel Jackson - BMO Capital Markets Canada

Your phosphate business -- since you closed Kapuskasing, the phosphate business has gone from being kind of the highest-margin phosphate business in North America to being now breakeven. Maybe you could talk about where you see this business going, specifically for, of course, Conda and Redwater and if it makes sense to be in the business anymore considering some of the challenges you're having with OCP rock?

Charles Victor Magro

Yes. I've already talked a little bit about our phosphate business. Certainly, strategically, we're focused on trying to find low-cost integrated rock for Redwater. We think that is the key driver to improving overall profitability of, certainly, Redwater. From an operations perspective, though, Ron and his team are well aware of the situation. I think we've got a pretty good plan to improve things operationally, and I'm going to let Ron talk more specifically about that.

Ronald A. Wilkinson

Joel, it's Ron. A couple of things, one is, you mentioned rock. And yes, we've lost an advantage there at Redwater. The other 2 things that can affect phosphate profitability, though, are your ammonia input cost and your sulfur input cost. And we have, over the last couple of years, lost some advantage there, so those are also moving parts in the equation to get phosphate margins. As far as Redwater goes, we have had some teething pains with the Moroccan rock. We believe we're largely through those now. And on both businesses, it's clear they're not making the returns we want. So we'll be very focused on costs going forward on both those businesses so that we can get them back into a profitable position.

Charles Victor Magro

And the last thing I'll tell you, Joel, is we're focused on rock. And if we're not successful, then, of course, we need to look at other options to improve the overall business performance. But it's too early to start talking in detail about that.

Operator

Our next question comes from the line of Chris Parkinson from Crédit Suisse.

Christopher S. Parkinson - Crédit Suisse AG, Research Division

Can you talk a little bit about any transportation logistical challenges you may still be facing within Retail and Wholesale in either Canada or the Central U.S? And then just how comfortable were you in the beginning of the season with your product position within your asset base? And then also, how do you feel about it right now?

Charles Victor Magro

Yes. I'm going to have Susan Jones, our Head of Sales and Marketing and Distribution for Wholesale to talk about our current logistics challenges.

Susan C. Jones

Yes, Chris. So although we had particularly in Western Canada bottlenecks within the system due to heavy grain inventory, which certainly with the government legislating grain to move, has impacted our input channel. Having said that, we have been able to position both in Q1 and early in Q2 our inventory through to our Retail channel. So we are actually sitting in a very good position from our inventory standpoint. From a potash perspective, the winter certainly was much colder and had a lot of impacts -- more impacts than we had expected. But this is a great example of how we were able to position our inventory early within our Retail channel. And in fact, if you look year-over-year, we did move more potash in this quarter than we did last year. So we feel quite comfortable. We've got good inventory and position. And we are hoping for a little bit later spring for potash to allow it to keep moving through to the end user.

Charles Victor Magro

Yes. Chris, what I would tell you is, of course, we were impacted like every other producer in North America. But one of the things that we were able to do to mitigate some of the impact is the integration strategy and being able to move product into the Retail system a little sooner than normal in preparation. Once we saw that the rail was not going to improve, we were able to do a little bit of that. But it did impact us. There's no way around it. There's been a lot of discussions in Canada around what does it mean and how can the Canadian railroads continue to support the foundation of manufacturing, specifically the grain production as well as the fertilizer production and the oil and gas business. And there is going to be a lot of changes, I think, going forward. But I think, from an Agrium perspective, we've been quite successful in trying to mitigate some of that damage.

Operator

Our next question comes from the line of John Chu from AltaCorp Capital.

John Chu - AltaCorp Capital Inc., Research Division

Just 2 quick questions. Just in terms of the Retail tuck-in strategy, is there any seasonality in terms of when there might be more transactions taking place? For example, in the summer when it's a bit slower, do you find there might be more opportunities during that period versus now when it's a bit busier? And then the second question just being on the phosphate rock, trying to find new sources there. Obviously, going greenfield can require quite a bit of CapEx to get that project going. And I know that on the nitrogen side, in the Corn Belt, one of the rationales for holding off on that was it was a bit of a big CapEx program at that time. So just trying to get my head wrapped around where Agrium might go with trying to outsource its own phosphate rock.

Charles Victor Magro

Okay, okay. Well, maybe I can comment a little bit at high level on the rock and how we would strategically work ourselves through that, and then I'll pass it over to Steve Dyer to talk about the Retail tuck-ins and the seasonality that we see there. So you're right, John. Potentially, this could be a pretty significant capital investment, and my view is quite clear on this. We know what the economics are right now for having imported rock from a supply contract. And the key question that we have to ask ourselves is not, "Can we find the rock?" The rock is out there. It's, "Can we make the right investment hurdles based on very open economic analysis against the imported rock?" So it's really a matter of can we get a sufficient return for a capital investment for the rock. And if we can't, then we have other options. We can continue with the imported rock or we'd have to look at alternatives. So I think that this is one where, actually, we just have to let the economics drive the overall decision when it comes to, can we find rock for the right return? And it really is going to come down to understanding that. Now what we've done is we've looked at a whole host of rock resources and we've kind of whittled that down. We've also said that this is going to take a little bit of time because this is going to be a pretty big decision for us, of course, and we have some time because, of course, we have the supply contract in place until the end of 2017. So beyond that, maybe I can have Steve talk a little bit about the seasonality and tuck-ins.

Stephen G. Dyer

Yes, John. On the tuck-ins, yes, we definitely see more activity in the third quarter and fourth quarter, the fourth quarter in particular. Actually, the first quarter is usually our slowest, so that's why we're pleased we were able to get 5 done in the first quarter of this year.

Charles Victor Magro

And with that, operator, we're right up on the hour time slot. We've got our AGM on today. Thank you for dialing in. If you have any further questions, the IR team is -- will be manning the phones today, and so thanks for joining us today.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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